Fraud in the ‘outback’: Capable guardianship in preventing financial crime in regional and remote communities

Foreword | The Australian Institute of Criminology previously estimated the cost of fraud in Australia in 2005 to be approximately $8.5b (Rollings 2008). Fraud risks affect all sectors of society extending from those who provide government services, to those who receive benefits, as well as private sector businesses such as primary producers, and those who buy and sell goods and services online. In this paper, the specific risks of financial crime that arise in and subsequently affect those in remote and regional communities in Australia are explored. The risk of fraud is increased because of the difficulties that arise in ensuring adequate levels of ‘capable guardianship’ in non-urban locations which are often disadvantaged in terms of money and knowledge of fraud risks, as well as the ability to avoid them. Examples of recent fraud cases from regional and remote Australia are used to highlight the risks associated with fraud in these places and to indicate where the absence of guardianship may have increased risks. It is concluded that capable guardianship, as a whole, needs to be enhanced outside major cities in order to reduce the level of fraud experienced by government, businesses and individuals each year.

Adam TomisonDirector

Three decades ago, two American criminologists, Lawrence Cohen and Marcus Felson, outlined the elements of a theory to explain trends in crime rates in terms of changes in the routine activities of everyday life. They argued that the structure of ordinary daily activities influences criminal opportunities, especially for so-called ‘direct-contact predatory violations’ (Cohen & Felson 1979: 589).

Structural changes in routine activity patterns were said to influence crime rates by affecting the convergence in space and time of the three minimal elements of direct-contact predatory violations:

the presence of motivated offenders;

the availability of suitable targets; and

the absence of capable guardians against a violation (Cohen & Felson 1979: 589).

This paper examines how capable guardianship can be enhanced when responding to fraud in remote and regional communities. Guardians are not only police officers or security guards; rather, they can be anyone whose presence or proximity would discourage a crime from taking place. Guardianship is often inadvertent, yet still has a powerful impact on crime. Capable guardianship can be promoted through a range of activities and by a variety of actors. These include:

police, who provide a general deterrent effect in the community, where fraud may not occur due to a fear of criminal prosecution and punishment being imposed (eg state and territory police, including Aboriginal Community Police Officers in regional and remote areas);

regulators, who can ensure that organisations act properly when conducting business (eg The Office of the Registrar of Indigenous Corporations and the Australian Competition and Consumer Commission (ACCC));

government agencies acting in accordance with fraud control plans to minimise opportunities for fraud to occur (eg Attorney-General’s Department, Corruption and Crime Commissions, Consumer Protection Agencies);

internal business controls that ensure that where fraud is identified in business activities it is addressed (eg through good corporate governance and internal controls);

communities where crime occurs which can identify anomalies in day-to-day activities that may give rise to fraud offences (eg Aboriginal and Torres Strait Islander community groups. In this paper, these communities will be referred to as ‘Indigenous’ communities); and

individuals generally, who can observe what is happening around them and report suspicious activities to authorities (eg through natural surveillance and the use of reporting hotlines, or through community leaders and elders).

To illustrate the roles of each of these actors, and the impediments that exist to their effective prevention of fraud in regional and remote communities, examples of a range of recent financial crimes that have taken place, or affected individuals or organisations in regional and remote communities in Australia are presented. The paper concludes with an examination of how fraud risks could be minimised through the use of enhanced capable guardianship.

The examples presented are drawn from non-urban areas, as defined using the Australian Bureau of Statistics (ABS) classification of major cities—inner regional Australia, outer regional Australia, remote Australia and very remote Australia (ABS 2009). This classification system is somewhat problematic as its aim is not to determine remoteness as such, but to divide Australia into regions for statistical purposes. This can lead to very different community types being classified similarly or differently based solely on location, when other comparison measures such as population size or service infrastructure may be more salient (Carrington 2007). For example, Darwin and Broken Hill are both listed as outer regional, whereas Newcastle is listed as a major city (ABS 2009). The examples of fraud presented in this paper have come from regional (inner and outer) through to very remote areas.

Opportunities for fraud in regional and remote areas

Fraud against governments

A variety of fraud risks arise in connection with the work of government agencies in regional and remote communities. One area of concern relates to misuse of special subsidies that are available to public servants. In one area, for example, the chief financial officer of the Pilbara Development Commission was investigated by the Corruption and Crime Commission of Western Australia (CCCWA) in 2009 for using a government-issued credit card for personal expenses (CCCWA 2010). While investigating these charges, it was discovered that the officer had abused the Home Ownership Scheme Grant—a government subsidy that had been created to encourage public servants to live in remote communities.

Eight charges of stealing and two charges of fraud involving more than $100,000 were alleged in connection with the receipt of Home Ownership Scheme Grant subsidies of $38,035, received between November 2003 and August 2007. The accused knew that she was ineligible for assistance as she already owned a home within reasonable commuting distance of her workplace (‘Accused knew she was ineligible for subsidy’ The West Australian 25 May 2010). The accused was found guilty and sentenced to two and a half years imprisonment and was eligible for parole after 15 months (CCCWA 2010).

Social security fraud is a serious problem throughout Australia with tens of millions of dollars being fraudulently obtained in 2008–09 (Centrelink 2010a). In regional Australia, large sums are paid each year in government benefits for financial hardships that are, in some cases, unique to these areas. Examples include support for prolonged unemployment (Scott et al. 2007) and disaster payments following floods and drought. Occasionally, these types of payments may be claimed fraudulently, although some dishonest conduct may be unwitting, where it occurs through lack of accurate knowledge of government procedures and financial rules.

In one case, a highly respected Indigenous elder was found to have improperly received social security benefits (McKean 2010). He had been working part-time as a groundsman and cleaner at a school earning $265 a week. He pleaded guilty in the Mackay Magistrates’ Court to fraudulently obtaining $13,818, although he had already repaid $10,000 using his superannuation funds and argued that the offence was due to a mistaken belief that the Australian Tax Office would automatically adjust his annual returns to account for his small income and welfare payments (Mckean 2010).

Fraud has also taken place in connection with disaster relief payments. Such payments, while available to all Australians, tend to be paid predominantly to those in regional and remote communities for the hardships faced during extreme climatic conditions. In regional areas, drought and flooding can financially ruin farmers. Following the Queensland floods of 2009, for example, a man in the outer regional township of Innisfail made a legitimate Australian Government Disaster Recovery Payment claim on 12 February 2009, but made a further three false claims on 24 February, 26 February and 26 March, illegally receiving a total of $3,000 (‘Natural disaster relief fraud: Flood of trouble for three illegal claims‘ Innisfail Advocate 14 April 2010). Similar cases have been documented in connection with the flood relief payments in January 2011 (Grimson 2011), alongside cases of fraud being perpetrated against the victims of the Queensland floods (‘Swindlers prey on flood victims’ The Age 19 January 2011).

Fraud against Indigenous Australians

Indigenous Australians, whose population is greatest in regional and remote Australia (Hogg & Carrington 2006), are vulnerable to fraud and financial crime victimisation. This can occur in a number of ways and arises from their personal and financial circumstances and backgrounds (ICAN 2010). Lending is an area where a number of cases of fraud against Indigenous Australians has been recorded.

In the Kimberley Region of Western Australia, a so-called ‘loan shark’ loaned money to Indigenous people living in remote communities at excessive interest rates of between 33 and 50 percent. The lender took control of 180 EFTPOS cards and Personal Identification Numbers (PINs) in order to gain access to Centrelink payments, which were used to satisfy outstanding interest payments. Sums of between $3,000 and $5,000 were improperly obtained on Centrelink payment days when accounts would be accessed and funds withdrawn. The court found there to be a case that the lender had breached the Fair Trading Act 1987 (WA) and the Credit (Administration) Act 1984 (WA) and ordered that he be restrained from lending money and taking control of EFTPOS cards and using them to obtain funds from debtors (Driscoll v Tomarchio [2010] WASC 157).

Another example of fraudulent behaviour towards Indigenous communities occurred between February 2006 and March 2007, when a telecommunications company made several misleading and false statements to members of remote Indigenous communities in connection with mobile telephone plans. These statements led consumers to believe that services would be provided in remote areas when, in fact, coverage was unavailable. The company pleaded guilty and the court issued a series of orders requiring the company to change its marketing practices (ACCC v EDirect Pty Ltd [2008] FCA 65 12 February 2008).

Fraud in connection with community stores in remote Indigenous settlements has also been documented (Westbury 1999). Cases of this type prompted an inquiry into governance of stores and other questions by the House Standing Committee on Aboriginal and Torres Strait Islander Affairs (2008).

The creation and sale of Indigenous art is an important way in which income is earned in remote communities. However, art forgery has become a prevalent problem that has affected many Indigenous Australians (Chappell & Polk 2009). In one recent case, a number of artworks including paintings, boomerangs, didgeridoos and other items that were alleged to have been painted by an Australian Aboriginal artist were displayed for sale on an Internet site. The ACCC prosecuted the company that created the website. The director was found to have imported wooden ornaments from Indonesia and employed a non-Indigenous graphic artist to paint them in ochre, earth and opal cross-hatching (ACCC v Australian Dreamtime Creations Pty Ltd [2009] FCA 1545 21 December 2009).

Other instances of misrepresentation involving Indigenous art include two art galleries, located in Kuranda and Cairns, that offered for sale artworks painted by three non-Indigenous artists, which were represented as being genuine Indigenous art. (ACCC v Nooravi [2008] FCA 2021 29 August 2008).

In another well-publicised case, a non-Indigenous woman from Toorak, Melbourne was found guilty of forging four paintings of a renowned Indigenous artist who lived in the Kimberley region of Western Australia and who had died in 1998 (Chappell & Polk 2009). The accused and her husband were sentenced to three years imprisonment, of which two years and three months were suspended (R v Ivan Liberto and Pamela Yvonne Liberto [2008] VCC 1372).

Business and financial fraud

Fraud can also occur in connection with business activities in remote communities. In one case, an administrative officer employed by a company that managed an Aboriginal art and craft centre used the company’s online banking to transfer funds on 81 occasions, totalling $245,729.60, from the company’s account to her own personal accounts. In sentencing her to five years imprisonment, (suspended after 14 months), the court noted her extensive history of dishonesty, but also her gambling problem and severe depressive illness (The Queen v Roseanne Rita Payne 11 June 2010).

In a similar case, a female clerk was charged with 14 counts of stealing from a nickel mine in Kalgoorlie between 16 October 2008 and 13 February 2009 (‘Woman faces fraud charges’ Mandurah Mail 29 October 2009). The woman used her position to transfer $314,656.64 to her and her husband’s personal bank accounts. She was sentenced to 22 months imprisonment (‘Woman jailed over $315K fraud’ ABC News Online 9 June 2010).

Another example of theft from a government-funded Indigenous business involved misappropriation of cash from an Aboriginal health service. The accused was employed as the executive director of the corporation between 22 April 2002 and 7 April 2004 and was found to have stolen cash on numerous occasions, totalling $126,624.80 (The Queen v Poulier [2007] NTCCA 04).

Fraud can also occur in connection with the financing of farming operations. A married couple in Broken Hill, for example, was able to secure loans for approximately $2.4m for the ‘Phoenix Land and Cattle Company’, by passing themselves off as wealthy cattle investors, using false drivers licences and Medicare cards and pretending that they owned a fictitious herd of 10,000 cattle which was said to be valued at $4.5m. The couple were in the process of securing another $18m in loans when it was discovered that the herd of cattle was non-existent (‘Family accused of $2.4m bank fraud’ Lending Central 11 March 2009).

Limitations of capable guardianship

These examples of fraud in remote and regional communities demonstrate the range of offences that can occur in these parts of Australia. Although there are few reported cases, the sums of money defrauded are considerable. Arguably, the theme that links these examples is the difficulty of achieving ‘capable guardianship’ in these communities. The difficulties related to each of the six types of guardianship outlined earlier will now be explored.

Criminal justice processes

The investigation and prosecution of financial crime is particularly difficult in remote communities as police often lack adequate training in fraud investigation and vast distances involved can make the collection of evidence difficult. For example, police have reported fraudulent claims in regards to cattle losses; however, it may be difficult for the police to decide if the claims are valid as they must determine if stock have been stolen, wandered off or have simply died (Donnermeyer & Barclay 2005).

In some cases, fraud offenders have a long history of dishonesty and any previous experience with the criminal justice system has not prevented them from reoffending. In one case, a Townsville bank employee charged with stealing $70,000 continued to offend even while on bail as an accounts clerk with another business in Townsville (Weatherup 2009). The offender in the art and craft centre case described above (Payne v The Queen [2007] NTCCA) had a prior history of fraud, while the couple in the Broken Hill loan fraud had appeared in court in Queensland for falsifying loan documents prior to their arrest in New South Wales (Cicolini v Spencer & Anor [2005] QSC 338).

Regulators

Difficulties have also occurred with guardianship by regulators. As outlined in the previous examples, regulators such as Centrelink and the ACCC play an important role in detecting and prosecuting fraud in regional areas. However, detection may take time. In the case of the Kimberley loan shark, for example, a report of abuse was made to the consumer affairs regulator in April 2008, but evidence was not immediately forthcoming (Taylor 2010b). A letter was then sent to the WA Commissioner for Consumer Protection and several articles were published in relation to the matter by The Australian newspaper for it to obtain official attention in January 2010 (Taylor & Barrass 2010). One of the problems encountered by officials was that although people knew what was happening, no one would make a formal complaint (Taylor 2010a). This may have been due to the ‘feast or famine’ cycle in remote Indigenous communities, where problems arise when people spend their income support payments as soon as they receive them and are then without money until the following fortnight (McDonnell 2003). This necessitates seeking funds from alternative sources that may be exploitative. With the Kimberley Loans example, individuals may have relied on the loans and therefore been reluctant to complain as they would have had limited options for funds had the finance source been terminated.

The Office of the Registrar of Indigenous Corporations (ORIC) regulates around 2,300 Indigenous corporations. In a study to determine the factors that can contribute to corporate failure, it was found that fraud was more likely to occur when an Indigenous corporation was in receipt of a combination of grant funding and other income, such as the art and craft centre example mentioned above. The study also found that the most common cause of failure was poor management and poor corporate governance (ORIC 2010). These findings suggest that early external intervention by regulators in corporations demonstrating poor corporate governance, poor management or facing potential insolvency could prevent both fraud and failure.

Government agencies

Difficulties have also been found with guardianship undertaken by government agencies. In the case of the chief financial officer of the Pilbara Development Commission who was investigated by the Corruption and Crime Commission of Western Australia, it was apparent that the fraud had continued for a lengthy period prior to its discovery (‘Accused knew she was ineligible for subsidy’ The West Australian 25 May 2010). Ensuring that all government agencies have effective fraud control measures in place would help to minimise risks of this kind (ANAO 2010).

Businesses

In remote communities where there are no automatic teller machines (ATMs) or bank branches, customers must obtain cash from community stores that have ‘become, by EFTPOS services, de facto banks’ (Westbury 1999: 10). This increases risks of fraud in community stores. It can also make personal budgeting more difficult for individuals. A recent report carried out by the Australian Financial Counselling and Credit Reform Association found that people in remote Indigenous communities incur significant fees for using community ATMs, where they are available, and may also be at high risk of exploitation by store managers with regard to excessive EFTPOS charges (AFCCRA 2010).

A lack of regulated banking services in remote areas leaves Indigenous people vulnerable to unregulated providers of financial services; for instance, welfare cheques being cashed at hotels, stores, hawkers and also by taxi drivers. There are examples of welfare cheques being sent directly to community stores and of people other than the recipient cashing cheques (Westbury 1999). This problem is exacerbated by low levels of English and/or literacy in some remote communities (ICAN 2010).

Having effective fraud controls in place can also minimise many business fraud risks. Where appropriate, such as when positions of trust are involved, businesses should consider undertaking background checks on new staff. Background checks could, for example, have prevented the incidence of fraud at the art and craft centre detailed above. At the time the offender was employed, she had a suspended sentence for fraud at another government office to the value of $350,000 and she had an extensive criminal record including 46 convictions for dishonesty offences (Payne v The Queen [2007] NTCCA 10).

Similarly, the fraud at the nickel mine occurred over a four month period with large sums being transferred regularly to the offender’s personal accounts. More effective internal auditing could well have enabled the fraud to be detected earlier.

Finally, in connection with the Broken Hill cattle property fraud, it was apparent that the couple had a history of fraud, theft and falsifying documents. Better intelligence systems could have revealed the non-existent cattle earlier.

Communities

Fraud in Indigenous communities is difficult to detect, partly due to the control those who manage community resources have on business activities and partly due to the constraints that kinship ties present. ‘Humbugging’, or demanding financial aid from relatives (McDonnell & Martin 2002), can at times involve threats of, or actual, violence. People’s general reluctance to report family members and/or the effectiveness of threats of violence or actual harm may affect willingness to report fraud or to seek other assistance (AFCCRA 2010; Willis 2011). Fraud in community stores may best be uncovered through the monitoring and natural surveillance of those who work in, and conduct business in, the community.

Reporting crimes, especially when victims suspect the offenders are their neighbours or family members, can be difficult not only because they know the suspects, but because they also have to continue living with them in the community.

Individuals

Individuals also have a role to play in detecting and preventing fraud. Centrelink, for example, relies heavily on tip-offs from members of the public, such as occurred in one case where a woman in Bundaberg was found to have received $46,861 in Single Parenting Payments when she was actually living with a partner. The deception was discovered through a tip-off from another individual (Centrelink 2010b).

Enhancing capable guardianship

Life in regional and remote Australia carries with it a number of criminogenic features relevant to financial crime, which make capable guardianship less effective than in cities. Examples include high levels of unemployment, limited economic opportunities and restricted access to services. Large land areas, community homogeneity in rural towns and customs and kinship ties in Indigenous communities can influence people’s decision to report fraudulent activity, therefore making effective guardianship less certain (Willis 2011). However, there are a number of ways that guardianship can be enhanced to reduce the risk of fraud.

Reducing financial disadvantage

First, and most importantly, the financial disadvantage that may encourage fraudulent activity needs to be addressed. The Kimberley loan shark was able to engage in fraud primarily because of the poor financial circumstances in which his victims found themselves (Taylor 2010b). Improving access to employment and enhancing welfare benefits could have positive implications for fraud reduction. In addition, improving access to legitimate loans could reduce the risk of financial fraud. Both government and the financial services sector need to address this problem, possibly though improved online banking services or the provision of enhanced face-to-face advisory services.

Improving remote and regional services

Improving services in remote areas may assist in removing some of the opportunities for fraud to occur. As noted above, improving banking services, such as by increasing the number of ATMs in Indigenous communities, may reduce the risks associated with obtaining money directly from community stores. In addition, improving literacy can help to ensure that scams are detected early and that instances are officially reported.

Regular surveillance by regulators may be less intensive in remote areas than in urban areas. As such, an increased police presence would provide communities with increased safety, enhancing both the responses to criminal activity and the surveillance of areas in which fraud is likely to occur. Enhanced training for police in fraud investigation may also be beneficial.

Improving business processes

Improving business management training may be an effective way of reducing fraud. The ORIC (2010) report noted that more corporation funds are lost to mismanagement than fraud. Conducting enhanced background checks on new employees is also an important way to minimise risks of repeat offending by fraudsters. Such checks identify employees who have a history of fraud and who may be likely to reoffend—especially if the new role involves book-keeping and accounting activities. Studies in the United States recommend, at the very least, that background checks should include close examination of criminal and civil court records, where legislation permits (Buckhoff 2003). While agencies may wish to undertake criminal history checks for individuals in positions of trust, less intrusive actions that businesses can take include obtaining references and checking information provided by applicants with independent sources in addition to nominated referees. This can sometimes be undertaken by external consultants with relevant expertise. In view of the potential losses that businesses can suffer as a result of fraud, allocating funds to basic fraud prevention measures is cost effective (Buckhoff 2003).

Increasing financial literacy

Recent government reports (ICAN 2010) and a number of court cases have revealed that Indigenous people, particularly those living and working in remote and regional areas, may be vulnerable and disadvantaged consumers when it comes to commercial transactions.

Indigenous people living in remote and regional areas also tend to have lower levels of financial literacy because of their isolation (McDonnell 2003). There are very few information and advocacy services available to assist people living outside of metropolitan areas in making complaints or pursuing their legal rights through the courts (ICAN 2010).

Improving education about finance and business could help minimise fraud committed through ignorance or by mistake, such as occurred in the case of the Mackay elder described above (Mckean 2010).

Understanding Indigenous community values

The ORIC report (2010) noted that there are differences between the values of Indigenous communities and that of the wider Australian community with regard to effective businesses practices. There are also particular conditions in Indigenous communities that may reduce the likelihood of reporting instances of fraud, such as kinship/social ties, forced sharing and book-up arrangements where stores cash welfare cheques on the basis that the proceeds are then used to purchase store goods—often at inflated rates (McDonnell & Westbury 2002). In general, Donnermeyer and Barclay (2005: 4) noted that those in rural communities ‘cling to traditional values and maintain informal social relationships’ and may fear reprisals from those in close-knit communities for reporting crime to police (Willis 2011). Here, whistleblower protection legislation may have little benefit for residents.

Finally, living in remote communities where financial disadvantage is more likely can enable fraud to be rationalised more easily. Living in a disadvantaged region may lead people to rationalise dishonesty by arguing that the government can afford to pay for theft or that they are deserving of better treatment.

Conclusions

The paper has highlighted the diversity of fraud that occurs in regional and remote areas in Australia and demonstrates the difficulties in preventing financial crime through a reliance on capable guardianship. However, it is apparent that many opportunities exist for early detection or prevention of fraud through more effective action by a range of guardians. The extent to which this occurs should be subject to ongoing monitoring to determine which actions can achieve the best results in rural and remote settings.